Before the ink has dried on the America Invents Act, a new patent bill was recently introduced in Congress. The bill, dubbed the SHIELD Act (Saving High-Tech Innovators from Egregious Legal Disputes Act) or HR 6245, is sponsored by Congressmen Peter DeFazio, D-Ore., and cosponsored by Representative Jason Chaffetz, R-Utah. This act appears to be a major assault on patentee (patent holder) rights.
The bill introduces new Section, 35 U.S.C. 285A, which reads in part as follows:
“(a) In General- Notwithstanding section 285, in an action disputing the validity or alleging the infringement of a computer hardware or software patent, upon making a determination that the party alleging the infringement of the patent did not have a reasonable likelihood of succeeding, the court may award the recovery of full costs to the prevailing party, including reasonable attorney’s fees, other than the United States.”
The bill has been promoted as a “balanced” bill, addressing plaintiffs’ and defendants’ issues alike. However, it is no such thing – it is designed to shut off patentees, and only patentees.
First, note the text of the bill: whereas the preamble in Subsection (a) refers to both types of actions – “action disputing the validity or alleging the infringement” – the substantive law section is geared exclusively against the patentee “alleging the infringement.” The substantive section of the bill provides no mechanism for patent holders to recover against accused infringers who raise frivolous defenses (whether raised as a defense in a case in chief or in a declaratory judgment action). The “balanced” preamble is just a smoke screen.
Second, if this bill were law, it would effectively transform our civil legal system to a “loser pays” system, but only in patent suits, providing for judgments only against patent holders. Not only is this bill grossly imbalanced in its effects on patentees and defendants, it would provide recovery by accused infringers of not only attorney’s fees but full costs, reasonable or not – a dramatic deviation from general rule, for egregious and exceptional civil cases, that provides only for the recovery of reasonable attorney fees.
Indeed, the bill’s co-sponsor acknowledges and states “[t]his bill combats the problem of patent trolls by moving to a ‘loser pays’ system for software and hardware patent litigation.” However, the bill’s sponsors fail to explain what makes the frequency, risk, or social harm of “egregious” patent lawsuits any different than those of other “egregious” civil suits in America so as to single out patent right enforcement for a special treatment under civil law. In fact, the following graph shows that in the last four decades the number of patent lawsuits filed per year has risen at slower pace than other IP lawsuits or when compared to all Federal civil suits. Patent lawsuits now constitute a little over 1% of all Federal civil suits – the same fraction as that in the mid 1970’s.
The anticipated effects of a “loser pays” system can easily be predicted based on the British experience. While the SHIELD Act only begins with recovery of attorney fees and costs, little time would pass before the bill proponents’ will also seek to require that patentees post a bond in the amount sufficient to compensate the accused infringer in the event he prevails.. This would make patent enforcement costs prohibitive, killing small business and startup patentees, as it does in the UK.
While there are indeed a few exceptional cases of egregious patent litigation, as there are in other civil litigation, the existing law already addresses these issues by providing recovery from the losing party. The approach has been the law since the 1952 patent act, that introduced 35 U.S.C. §285. Accompanied by Rules 11 and 57, of the Federal Rules of Civil Procedure which proscribe egregious conduct in litigation, these existing laws have a long and demonstrated track record at limiting egregious litigation.
The potential for egregious litigation did not arise only recently – as some technology companies allege. The application of §285 over the years demonstrates that in virtually all cases, courts recognize the principle that misconduct in connection with patent litigation which evidences bad faith tends to render a patent case “exceptional” within the meaning of the statute. Where the losing party has not acted in bad faith, it has generally been held that the standard of exceptionality is not met. That is the balanced standard we want, and that is what the existing law provides.
For further detail, the reader is referred to the following American Law Report: Martin M. Heit, “Misconduct related to litigation as rendering patent case ‘exceptional’ for purposes of 35 U.S.C.A. § 285,” 64 A.L.R. Fed. 175 (2012). Heit’s article is a broad survey of §285 case law, one that demonstrates the rich protections against abuse that now exist under current law in §285.
The proposed SHIELD Act seeks to go well beyond punishing patentees’ egregious conduct and compensate wrongly-accused infringers. Rather, it seeks to fundamentally tilt the existing balance of risks among litigants in order to erect additional barriers for patent enforcement. Note the proposed statute’s preamble – “Notwithstanding section 285” – and the provision attaching liability to the patentee who “did not have a reasonable likelihood of succeeding.” In other words, the bill’s premise is that the protections and remedies under existing law – which for years have protected against fraud, abuse and bad faith – are now considered inadequate!
Now, the bill’s proponents want to subject patentees (and only patentees), who committed no act of bad faith, to liability solely on a basis of a colorful difference of opinion as to their likelihood of success. The proposed law requires a patentee make a determination ex-ante, of what a court would deem to be, ex-post, unreasonable. Would the determination of likelihood of success be applicable before or after the Markman hearing? In contrast with its title, this proposed statute is not keyed on any “egregious” action or abuse; it does not provide notice as to the conduct to which liability attaches; it is designed to simply shift the patent litigation risks onto patentees. For this reason it should be summarily rejected without any opportunities for amendments.
Another section of the bill contains a definition of “a computer hardware or software patent” that would be subject to the bill’s provisions. It is worth noting that Representative DeFazio’s bill started making the rounds on the Hill as targeting only “software patents.” It appears that obtaining Representative Chaffetz’s co-sponsorship may have required broadening the target to include “computer hardware.”
However, any focus on the definition of “a computer hardware or Software Patents” misses the point and deflects attention from the real issue. That definition is irrelevant, as it fluidly shifts in order to expand the bill’s sponsorship base. If enacted, a bill of this kind for any patentable subject matter is a slippery slope and a kiss of death to the value of any patent.
Finally, legislative safeguards against egregious harassment actions should be enacted, but only in proceedings for which no such protections are currently available under state tort law or under Federal law – for USPTO administrative proceedings such as ex-parte reexaminations, post grant reviews and interpartes reviews. Here, federal courts have ruled that a patent owner’s state court suit for damages against a party who unlawfully requests reexamination is preempted by federal laws governing the USPTO. But the USPTO has acknowledged that it offers no remedy to a patent owner victimized by fraud in reexamination and other post-issuance proceedings. A federal cause of action should be available, but under current law it is not. It is only for these proceedings that a legislative fix should be provided. The SHIELD Act, however, should be summarily rejected, as it is a recipe for suppressing patent protection and investments in inventions.